U.S. Fed cuts rates to zero in bid to quell coronavirus impacts

Martha Porado | March 16, 2020

In a historic move, the U.S. Federal Reserve lowered its target range for the federal funds rate to between zero and 0.25 per cent on Sunday.

The Fed is taking the emergency action in a bid to help alleviate the extreme economic disruption caused by the spread of the coronavirus. It said it intends to maintain rates at these levels until it’s confident the U.S. has weathered the impacts.

The cut comes after a week when markets around the world saw some truly significant losses. In Canada, many are already referring to March 12 as Black Thursday, since it was the most damaging day the TSX/S&P composite index has seen since 1940.

With central banks running out of ammunition, institutional investors will be watching other economic signals closely.

“Efforts to contain the outbreak will likely bring economies to a standstill, so investors should be looking to fiscal policy for spending to bolster health-care systems, as well as households and smaller companies facing cash-flow problems,” said Kurt Reiman, managing director and chief Canadian investment strategist at BlackRock Inc., in an email to Benefits Canada.

“Central banks moved preemptively and aggressively to encourage borrowing, soften the tightening in financial conditions and shore up the financial system against liquidity pressures. But monetary authorities are quickly reaching their limits. The baton is now in the hands of governments to provide aggressive stimulus.”

Canada’s central bank does have further ammunition, he added. “The Bank of Canada isn’t finished cutting rates — that was true before Sunday’s Fed decision and it’s especially true now. There’s very little standing in the way of the BoC bringing policy rates to zero.”

Given the uncertainty about how long the crisis will last and how effective public health measures will prove to be, the environment for risk assets has changed dramatically, with the cushion normally provided by safe havens like government bonds significantly diminished as yields tumble, he said.

The Canadian Imperial Bank of Commerce and the Royal Bank of Canada were among the many banks and economists predicting late last week that Canada will enter a recession this year, mainly due to the coronavirus, market uncertainty and slumping oil prices.

In addition to Sunday’s cut, the Fed has been ramping up bond buying and has announced a US$1.5 trillion short-term financing extension.

“This firepower unequivocally confirms a Fed that is intent on flooding the U.S. and international markets with liquidity,” said Dec Mullarkey, managing director of investment strategy at SLC Management, in a statement.

The Fed is eager to maintain the functionality of credit markets and avoid interruptions to cash flow that could impact U.S. jobs, thereby harming the American consumer base, he added.

“The Fed sees the consumer as the pillar of the economy and, in turn, wants to help companies bridge what could be months of dislocation as the virus dents activity. While reassuring that the Fed wants to attack the current crisis with all its policy might, the subtext that serious cracks and storm clouds are developing is not lost on markets.”